Apple's lawyer said the agency model is beneficial to both consumers and markets

The e-books price-fixing trial with Apple has begun, and a U.S. government lawyer accused Apple of conducting shady business practices with the five book publishers.

"Apple told publishers that Apple - and only Apple - could get prices up in their industry," said Lawrence Buterman, a lawyer at the U.S. Department of Justice (DOJ).

Buterman also added that Apple's agency model with publishers (where publishers set the price and Apple takes a 30 percent cut) hurt consumers by raising prices.

"Overall, average prices of e-books went up, costing consumers millions of dollars," said Buterman.

The three-week trial, which started yesterday, concerns the DOJ's lawsuit against Apple in regards to its method of fixing prices for e-books.

Orin Snyder, Apple's attorney, disagrees with the DOJ's statements.

"What the government wants to do is reverse engineer a conspiracy from a market effect," said Snyder. "Agency [model] is good and beneficial to consumers and markets."

Snyder added that DOJ's evidence, such as emails from former Apple CEO Steve Jobs, will likely be misinterpreted. He also said that average e-book prices fell after Apple entered the market, dropping from $7.97 to $7.34.

Apple is the target of the e-books investigation along with book publishers Hachette Livre (Lagardère Publishing France), Harper Collins (News Corp., U.S.A.), Simon & Schuster (CBS Corp., U.S.A.), Penguin (Pearson Group, United Kingdom) and Verlagsgruppe Georg von Holzbrinck (owner of inter alia Macmillan, Germany). However, all the book publishers have already settled with DOJ, so Apple is the only company going to trial.

This all started in April 2012, when the U.S. Department of Justice (DOJ) sued Apple and the five book publishers over anticompetitive practices concerning e-book sales. The book publishers were accused of partaking in an agency sales model with Apple, and the publishers could not let rivals sell the same book at a lower price. Traditionally, publishers sell physical books to retailers for about half of the cover price, which is considered a wholesale model. Retailers then had the ability to sell those books to customers for a lower price if they wanted to.

But when e-books came along, this model was challenged. Amazon started selling best sellers for as low as $9.99 to encourage its Kindle e-reader sales. Publishers were not happy with this because they thought the prices were too low.

However, Apple attempted to resolve this when it struck a deal with publishers to implement the agency model in 2010. This helped Apple at the time of its iPad and iBooks launch. But its deal with publishers made it seem like an attempt to thwart Amazon's dominance.

In April of this year, DOJ used an old email from former Apple CEO Steve Jobs as evidence in the e-books case. The email (dated in 2010) from Jobs to James Murdoch of News Corporation said, "Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99.”

U.S. District Judge Denise Cote, who is overseeing the trial, said last month in a preliminary hearing that the e-books price fixing case seemed to fall in favor of the DOJ.

"I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books, and that the circumstantial evidence in this case, including the terms of the agreements, will confirm that," said Cote.

The publishers have already admitted guilt and have settled with the Department of Justice.Per the New York Times, the reason books are currently cheaper on Amazon:

quote: The settlement calls for the three publishers to end their contracts with Apple within one week. The publishers must also terminate contracts with e-book retailers that contain restrictions on the retailer’s ability to set the price of an e-book or contain a so-called “most-favored nation” clause, which says that no other retailer is allowed to sell e-books for a lower price.

Their contracts with Apple have already been deemed illegal. The book publishers broke the law. The only question that remains is would they have been able to do it without Apple's help. The very likely answer is "No." It is very unlikely that the publishers could have coerced Amazon, Walmart, or any other retailer into the agency model had Apple not forced the issue.

Keep in mind too that the Most-favored nation clause by its self does not constitute price fixing. Only the combination of the MFN and the mandatory 30% cut that Apple takes does.

For example: A publisher sells a book to Amazon for $10. Amazon chooses to sell that book at cost. The publisher still gets $10, Amazon sells more books and more Kindles, and customers pay less. Everyone wins, with the possible exception of Barnes and Noble and Border's.

Then Apple enters the market and tells publishers, "you can't allow Amazon (or anyone else) to sell the same book for less than us." (This is the most-favored nation clause.) They then tell the publisher that they will take 30% of the sale price right off the top and only pay the publisher the remainder. The only benefit to the publisher is that they get to set the price. The publisher then has to go to every other book seller in the world and tell them what price to sell their books for. (This is called the "Agency" model, where the seller acts as an agent of the publisher.) The publisher also doesn't want to be paid less than they were before, so they set the price to $15 dollars (this allows Apple to take their 30% cut and still leave at least $10 for the publisher.)

In this case:1. Apple (and all other book sellers including Amazon) win - they are guaranteed a 30% margin on all sales.2. The publishers don't lose (or gain) anything other than a possible change in the quantity of books sold.3. The customers (at all booksellers) lose - they pay more for the same book.

Understandably the Department of Justice shredded those contracts. Consumers were clearly being harmed by a cartel of book publishers. The question remains, was it Apple's fault?

I think that the key finding will be that all the book publishers strongly resisted the most-favored nation clause. The only reason that any of them agreed to it was because Apple required it. In my book, that makes Apple guilty.